Latin America's election super-cycle raises stakes for oil companies

Political Risk Outlook 2018 - Oil & Gas

8 March 2018

Oil and gas companies operating in Latin America could be set to face a rockier future in key markets if the likely shift towards anti-establishment candidates in Brazil, Mexico and Colombia's upcoming elections materialises.

Out latest Political Risk Outlook looks at a number of populist and 'outsider' candidates polling well in highly contested races by tapping into public anger at mainstream politicians over high-profile corruption allegations. Some are also campaigning for the abandonment of recent pro-market reforms that have created a favourable oil and gas regulatory environment.

The renewed prominence of these anti-establishment candidates could make 2018 an uncertain year for oil producers.

Mexico: Is the recent oil sector opening vulnerable?

The election of Donald Trump could make Mexico's voters respond by backing their own populist and nationalist option, Andrés Manuel López Obrador (AMLO), who unlike the US president has a vast political experience.

AMLO's long-standing anti-corruption platform is resonating with an electorate disillusioned by the ruling PRI's lack of progress on improving transparency. Allegations that bribes were funnelled via PEMEX to the PRI's 2012 presidential campaign have the potential to rock this year's contest and propel AMLO into power.

Impacts for oil and gas investors may be significant if he wins.

"While he cannot easily reverse the recent liberalisation in the oil and gas sector, it could lead to a pause in licensing as he revisits Peña Nieto's ambitious hydrocarbon tender schedule,"

RoseAnne Franco, Head of Oil and Gas

With pledges to review existing exploration and production contracts for any signs of corruption the issuing of permits may also slow down.

Left-of-centre candidates lead in key Latin America

Left-of-centre candidates lead in key Latin America

Colombia: Oil sector searching for legal and social stability

In Colombia's presidential campaign, most candidates have broken ties with traditional political parties, whose reputations have been tarnished by allegations of corruption. The sheer number of candidates suggests new alliances are likely to form in the coming months and that a run-off is inevitable. While the outcome remains far from certain, we expect an increasingly polarised political environment as a result.

Oil output will continue to slip and new investment will dampen if the incoming administration fails to provide greater legal certainty surrounding permits, states the Outlook. Colombia's extractive sector has been under unusual stress over the last two years - rising social activism led to an environmental agency to rescind a permit on an oil and gas project, and referenda have either slowed or stopped operations in several parts of the country. Oil and gas companies also need to take action themselves to help mitigate rising opposition, in particular by engaging with stakeholders, advises the report.

Brazil: Despite campaign rhetoric, pre-salt will need pragmatism

The uncertainty around the candidacy of former president Lula da Silva, the frontrunner in all polls, will overshadow the campaign up to the elections in October. Should Lula be barred from running on account of his corruption conviction, his absence would raise questions about the legitimacy of the election. It would increase the chances of otherwise unlikely contenders though, such as his former environment minister, Marina Silva.

Most candidates have yet to spell out their energy policy, or would likely continue with the current market-friendly direction, but we believe a victory for either Lula or Marina would increase risk levels. Based on Lula's past record and his campaign rhetoric, his return to office could delay tenders and slow the regulatory process. Marina would take a similar stance, though due instead to her environmental protection agenda and focus on renewables.

"We do not expect either of them to have the congressional support required to undo Temer's reforms," says Jimena Blanco, Head of Americas Research. "Given the scale of the investment needed to fully develop the pre-salt, no government is likely to stray too far from the current trajectory."

Venezuela: Looking into the abyss

The electoral outlier for the region is of course Venezuela. The recent move by the Constituent Assembly to bring presidential elections forward is unconstitutional, but with hyperinflation expected to worsen, earlier elections may spare President Maduro's deeply unpopular administration from a more difficult campaign later in the year.

The opposition is too weak and fragmented to respond effectively and Verisk Maplecroft does not expect a changeover in government. Social turmoil could force the military to assume a caretaker role if things take a significant turn for the worse though.

The administration will need to address sovereign and NOC default and restructuring in earnest for any new major inflows in investment to restart.

Coming full circle?

The number of elections scheduled to take place in 2018 is reminiscent of the 2006 electoral cycle, which saw the consolidation of the 'pink tide' that brought greater state intervention in the economy, an increase in government take, and the revitalisation of NOCs.

This time around though, we believe incoming administrations will confront a harsh reality. Stagnating or declining hydrocarbon production (in Mexico, Colombia and Venezuela), and NOCs under pressure (in Mexico, Colombia, Venezuela and Brazil) should stop the pendulum from swinging too far leftwards. So, while ideology could delay licensing and permitting, governments will be hard pressed to fully rewind recent gains lest they jeopardise resource development and fiscal balance.

Political Risk Outlook - Oil & Gas

Our Political Risk Outlook Oil & Gas analyses some of the primary issues impacting energy companies in 2018 and beyond. The full report will give oil and gas companies a unique perspective on the political risks impacting markets, exploration and production, as well as the move towards renewables.